Credit Suisse speeds up synthetic-to-physical ETF conversion

By: Risk Magazine | 02 May 2012

Credit Suisse is converting more of its synthetic exchange-traded funds to the physical model, which happens to be favoured by the Swiss Financial Markets Association

Credit Suisse has announced that it will convert six of its synthetically replicated exchange-traded funds (ETFs) into the physical model in May in response to client demand for physical funds. Physical replication is achieved through the purchase of the underlying constituents rather than using swaps to gain exposure to an index or securities.

The latest conversions, which will take place in May, will bring the number of converted Credit Suisse ETFs to 10 over the past six months. In November 2011, the Swiss bank switched four of its 16 synthetic funds: the Credit Suisse MSCI South Africa, Australia, Brazil and Mexico Capped ETFs.

The Credit Suisse MSCI Brazil ETF has seen assets under management (AUM) increase from $32.97 million in November 2011 to $97.97 million in March this year, according to Dan Draper, London-based global head of ETFs at Credit Suisse.

The Credit Suisse MSCI South Africa ETF increased its AUM from $20.25 million to $65.79 million in the same period. “We are hopeful for a similar response for the additional six we are converting,” says Draper. “Even in late 2010 and early 2011, we started experiencing increased client demand for physically replicated ETFs.”

Deborah Fuhr, a London-based ETF strategist, agrees. “Figures suggest investors have a clear preference for physical ETFs,” says Fuhr. “If you look at flows in terms of net new assets, there have been consistently more funds going into physical versus synthetic ETFs. Last year, synthetic ETFs had outflows of $4 billion and physical ETFs had net inflows of $29 billion.”

Australian ETF provider Betashares made a similar move in October 2011, changing the replication method for two of its funds from synthetic to physical. The ETFs had been the only swap-based funds in Australia.

Credit Suisse’s conversion of its ETFs from a swap-based to a physical model might also reflect the approach taken by the Swiss Financial Markets Association (Finma) at the end of last year, according to Nizam Hamid, head of ETFs at Lyxor in London. “There has been a general push on the Swiss side to look at funds that hold physical assets as being a better structure. Finma has also been talking about fully funded swap based funds in terms of not being considered a fund,” says Hamid.

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